M/S Shahi and Associates v. State of U.P.
Background
A contracting firm, Shahi and Associates, had a dispute with the U.P. government over payment for additional work on a drainage project. An arbitrator awarded the firm about Rs. 17.86 lakh plus 18% annual interest under the Arbitration and Conciliation Act, 1996. Both the District Judge and the Allahabad High Court later reduced this interest rate to 6% per annum, relying on an old U.P. state amendment to the repealed Arbitration Act, 1940. The firm appealed to the Supreme Court challenging only the reduction of interest.
Decision Breakdown
The Supreme Court held that since the arbitration proceedings had commenced in 1999, after the 1996 Act came into force, only the 1996 Act applied, not the repealed 1940 Act or its U.P. state amendment. Under Section 31(7)(b) of the 1996 Act, an arbitral award carries 18% annual interest unless the arbitrator specifies otherwise, and here the arbitrator had correctly applied that rate. The Court found the District Judge and High Court had wrongly relied on an obsolete, repealed provision to cut the interest rate. It set aside both lower rulings solely on the interest point and restored the 18% interest awarded by the arbitrator, with no order as to costs.
Lesson Learnt
Once the Arbitration and Conciliation Act, 1996 governs a dispute, older state-specific amendments to the repealed 1940 Act no longer apply: courts and parties must apply the interest rules of the Act actually in force when arbitration began.